Sun Hung Kai Properties is one of the heavyweights of Asian real estate development. Everything about it shows scale. Its land bank is Hong Kong’s biggest. And its profits, topping HK$10 billion ($1.28 billion) in a typical half, are the envy of the competition. Most of all there are the iconic buildings. The International Finance Centre (IFC), the Hong Kong tower so tall its top is often lost in the haze and invisible from ground level? That’s Sun Hung Kai. The International Commerce Centre (ICC), the tower across the harbour in West Kowloon that’s going to take IFC’s crown as Hong Kong’s tallest? That’s Sun Hung Kai, too.
Investors like it. Its peers and advisers clearly like it too. In this year’s Euromoney/Liquid Real Estate survey, it ranks not only as the top developer in Asia, but globally as well. But Michael Wong, executive director at Sun Hung Kai and the man responsible for strategic planning and financial investments, thinks the appeal is not just about size. "I think investors like us because we’ve got a focused and consistent business strategy," he says. "It’s a strategy that has lasted a long period of time. We don’t change it from year to year. They know exactly what we are doing in good times as well as bad." That is, focusing on Hong Kong and China, with an emphasis on high quality: landmark commercial buildings, top-end retail developments.
Still, scale helps. An aggressive land bank acquisition programme from July 2006, underpinned by winning tenders at Tuen Mun and Tseung Kwan O offered by the city’s mass transit operators, has put it back into the lead for land bank after a brief usurpation of the top spot by Li Ka-Shing’s Cheung Kong Holdings. At the interim results, announced in March, Sun Hung Kai held 42.5 million square feet of properties in Hong Kong, 22.7 million sq ft of it in completed investment properties and 19.8 million sq ft under development, in addition to more than 23 million sq ft of agricultural land, most of it in the process of land use conversion.
When the company needs capital, scale helps too. In June, Sun Hung Kai announced a HK$15.25 billion six-year syndicated loan, a revolving credit facility, with a consortium of 26 banks. It was the company’s largest-ever fundraising in a single hit. The deal originally went out for a HK$5 billion loan but was trebled on the back of the market reception. A facility of that size and tenor, for an A-rated issuer, at 26 basis points over Hibor is testament to the strength of the name.
That sort of financial muscle enables some outlandish projects, and none is more out of the ordinary than the Kowloon Station Development, which includes the 118-storey ICC. The three packages of the development that Sun Hung Kai is working on cover 2.5 million sq ft of offices, a million of residential units and serviced apartments, another million of hotels (notably the Ritz Carlton, at the top of the tower) and just under a million of retail space. The first stage opens later this year, with the Ritz Carlton concluding the development when it opens in 2010.
Developments on this scale can shape a whole market. A Merrill Lynch report says: "We believe the market is slowly accepting ICC as an alternative choice to expensive Central [the main business area of Hong Kong], but continues to underestimate the potential downward pressure on rental in Central." In fact, it’s driving landlord strategies on the other side of the harbour. Relocating tenants will start surrendering Central office space in the first half of 2008, so Merrill reckons landlords there will raise rates in 2007 to capitalize on the brief supply shortage before the ICC formally opens. "We understand Central landlords are forcing tenants to sign up on full three-year lease terms and are unwilling to negotiate any short-term leases or extensions," says a Merrill analyst.
Sun Hung Kai has other iconic buildings under way. Shanghai IFC is one, a twin-tower development in the Lujiazui financial centre of Pudong, a development recently bolstered by the news that HSBC will house its China headquarters there, taking 20 office floors. And the ION Orchard retail and residential tower in Singapore, more widely referred to locally as Orchard Turn, is considered one of the most significant new developments in the city state.
Apart from the obvious branding merits of being the developer of the buildings that appear on the postcards, Wong argues that there is strong commercial merit in this approach. "When major multinational companies or banks are looking for addresses in cities where they intend to expand in a significant manner, they always look for iconic buildings and reputable developers and managers," he says. "From my experience, both in Hong Kong and Shanghai, tenants and investors tend to look for these landmark buildings. It helps our reputation as well as our brand, and helps marketing for sale or rental."
Wong’s hope is that ICC will prompt Hong Kong’s cluster of investment banks to look across the harbour. Morgan Stanley has just signed up to lease 10 floors, which Sun Hung Kai hopes will be the first of several moves. "We are at an advanced stage of negotiations with a number of commercial banks and investment banks for relocating their offices to West Kowloon," says Wong. "In about a year’s time, when the first phase of ICC is open for occupation, people will find for the first time in the history of Hong Kong that the investments banks are going to the Kowloon side. It will have quite a big impact on the entire Core Central office market."
Wong thinks the outlook for the rather unpredictable Hong Kong property market is good on both the office and the residential side. "The financial sector will continue to benefit from global economic growth and abundant liquidity, which will boost demand for offices," he says. And on the residential side there is "further strengthening from rising income and a strong job market. We expect the luxury market to outperform the mass market in the next year or two." Sun Hung Kai operates a five-year policy on land bank replenishment so investors can see exactly what’s coming up.
China is the source of growth for the company. Here, Sun Hung Kai owns 19.8 million sq ft of gross floor area, only 2.6 million sq ft of it completed. Wong speaks of being focused on the four key cities of China: Beijing, Shanghai, Guangzhou and Shenzhen. In fact, the company is more diversified than that. It began construction this year on joint venture projects in Hangzhou and Wuxi, for example.
"We believe China will continue to prosper in view of rapid economic growth and people’s rising aspirations for home ownership," Wong says. He is confident that the Hong Kong model can be rolled out on the mainland: landmark projects, in big cities, a strong brand name, a balanced model between property sales and rental, and a focus on up-market residential.
There are differences, naturally. "One major difference is the land bank policy," says Wong. "The supply of land is very different in structure, as well as the government policy. In China we tend to focus more on prime locations, rather than just to increase our land bank for the sake of some headline numbers."
The Singapore development is a diversion from Sun Hung Kai’s usual Hong Kong/China axis, but will be interesting to watch, since it features two of Asia’s most admired developers, Sun Hung Kai and Singapore’s CapitaLand, on the same project. "We cannot find a better located site in Singapore any more," is Wong’s comment.
But even without looking at location, Sun Hung Kai is not quite as single-minded in its focus as Wong suggests. For one thing, it is now an active player in hotels. By the time the W and Ritz Carlton hotels in the Kowloon Station Development open, and hotels in developments in Tseung Kwan O and Tseuen Wan, the company will own 4,500 hotel rooms in Hong Kong alone. The Shanghai IFC development will include both a Ritz Carlton and a W hotel.
Besides that, Sun Hung Kai either owns outright or owns stakes in SmartTone, in the mobile phone industry; SUNeVision, an IT company; several transport and infrastructure businesses; and an apparel company called USI Holdings. One thing it hasn’t done yet is spin off a Reit, although two years ago it had planned to do so. "We’ve shelved it for the time being," Wong says. "But when market conditions come back we would seriously look at the possibility of relaunching it."
"Reit prices have been quite disappointing so far," he adds. "But I think that will be a short-term phenomenon."
With or without divestments, analysts like the stock. Merrill, perplexed by the company’s 22% discount to net asset value in August, rates it a buy. Macquarie Research Equities rates it outperform. "We favour the company based on its strong earnings, valuation exposures and, most important, its strong brand in upmarket residential that we project to outperform that of mass residential for at least the next 12 months," notes Macquarie analyst Eva Lee. And Goldman Sachs has upgraded the stock to buy thanks to "a more promising outlook for its luxury residential and commercial developments, which many investors have overlooked in our view".
For all of these ringing endorsements, it should be noted that Sun Hung Kai’s interim results were well down on the previous year, blamed in large part on the extraordinary margins the group had logged on a development called The Edge the previous year, which could not be replicated.
And not all fund managers hold Sun Hung Kai in such high esteem. "It has been late to the game both in terms of regional expansion and capital management," says Eng Teck Lim, a fund manager at Treasury Asia Asset Management in Sydney. "It has been slow relative to its peers such as Hang Lung, Henderson, and Cheung Kong in building up its Chinese land bank and is only starting to get more active while the others have already got a head start."
Lim is not impressed by the group’s capital management, both in terms of dividends and the absence of a Reit. "This has largely constrained its ability to improve its returns," he says. "There’s no doubt Sun Hung Kai is a giant in Hong Kong but the premium valuation which it used to command will dilute over time as other Hong Kong property companies have more success both overseas and in Hong Kong."
That criticism aside, Wong believes a big reason Sun Hung Kai is a favourite with investors is its intensive and proactive investor relations programme. "We try to be as open to investors as possible so there are no surprises," he says. "When they hold on to our shares, investors know we are going to perform. We are going to deliver our strategy and execute it up to expectations."
